Consumer spending and incomes both rise in August

WASHINGTON - October 1, 2010

Spending increased 0.4 percent in August, matching the July increase, the Commerce Department said Friday. The two increases followed June's flat reading on spending.

Incomes were up 0.5 percent, better than a 0.2 percent rise in July and a flat reading in June.

More spending and increased income are helping to sustain the economy, which is growing at subpar levels.

Consumer spending accounts for 70 percent of total economic activity and until it returns to a stronger pace, the rebound from the recession will be held back. But spending isn't likely to see a big gain until income growth accelerates.

The August rise in incomes would have been much lower - just 0.2 percent - without the extended unemployment benefits. The program had temporarily lapsed in July after Republicans blocked an extension. That lowered the total for incomes in the July report by about $17 billion at an annual rate.

The jobless benefits program resumed in August after Democrats gained enough votes to pass an extension through November. That boosted the total for incomes in the August report by approximately $21 billion.

The overall economy grew at an annual rate of 1.7 percent in the April-June quarter. Many economists expect growth to be around 2 percent for the rest of the year, mainly because of the weak growth in consumer spending.

"Consumption growth is unlikely to gain any real momentum when incomes are rising only modestly and households are still saving," said Paul Dales, senior economist at Capital Economics.

The two straight months of 0.4 percent gains in spending bolstered confidence that the country is not slipping back into a recession, fears that had been fueled by flat readings on spending in both April and June.

With incomes up slightly more than spending, the personal savings rate edged up to 5.8 percent of after-tax incomes in August. It was 5.7 percent in July. Both are much higher than the 2.1 percent average for the savings rate in 2007, before the recession began.

A key gauge of inflation tied to consumer spending showed prices rose a slight 0.2 percent in August. Excluding food and energy, prices were up 0.1 percent. This price gauge is up just 1.4 percent excluding food and energy over the past year, indicating that the weak economy has essentially banished inflation as a threat at the moment.

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